Stock Chart Boook
"Relative strength refers to how strong a stock is relative to something else," says swing-trade-stocks.com. "This could be either how strong it is compared to the overall market or the industry group that it is in."
If it is stronger than another stock, you say that it has relative strength. If it is weaker, we say it has relative weakness.
To give yourself better odds of a successful trade, you should only trade stocks on the long side that are stronger than the market itself. A good way to do this is to compare the stock to the S&P500.
If a stock is weaker than the S&P500, is has a relative weakness and is eventually sold off.
"You can also compare stocks to the specific industry groups that they are in. On the long side, you want to be trading the strongest stocks that are showing relative strength compared their industry group," says the site. "On the short side, you want to be selling stocks that are showing relative weakness compared their industry group."
You can also compare industry groups to each other to ascertain which industries are leading the market before selecting the stocks in those industries.
"Wait until the stock market sells off hard for a few days," says the site. "Now go through the stocks on your watch list. Which ones are up for the day that the market has sold off? Those stocks have relative strength and those are the ones that you should trading. Why? Because these stocks will be the ones that will move first when the market recovers and will make the most significant gains. Also, look at charts for the various industry groups. Which ones are up on big down days in the market? Those industry groups have relative strength and those are the ones you want to be in."
"This is completely the opposite on the short side. On big up days in the market look for the industry groups and stocks that are down for the day. These are weakest and the ones that you should be focused on for shorting," the website concludes. "Do not underestimate the simplicity of this technique! If you mainly trade on the long side of the market, use the down days in the market to go through your watch list. Find the stocks that are up for the day, showing relative strength. Then wait for the right time to enter the stock."
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